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Comment Thomas DeGalloway
It’s 10:42 this morning — Thomas de Galloway
The US dollar ended the week weaker. The pace of wage growth in the US is slowing. However, business activity in the US economy is also unexpectedly slowing. Chinese yuan rally continues.
US jobs data on Friday showed that wage growth slowed month-over-month (from 4.8% in November to 4.6% in December). The wage growth rate is a measure of inflation. The fact that it is declining supports the hypothesis that price pressures in the US are on a downward trend, affecting central bank policy. After the data was released, the probability of a 0.25 percent hike in the base rate at the next meeting increased from 54% to 67%. Estimates fell 0.50 percentage points to 33%. Several members of the Fed committee indicated that their decision was influenced by conditions in the labor market.
A second factor supporting the current dollar weakness is the slowdown in business activity as measured by the ISM index. It showed contraction for the first time since April 2020 for various sectors, including real estate and wholesale. This indicates that demand (and therefore inflation) in the economy is beginning to cool. Nevertheless, there were also signs that the tightening of the labor market was far from over. Job creation is still high and unemployment is at its lowest level in decades. As a result, the market is eagerly awaiting December inflation data due on Thursday. Depending on the outcome, these could be a deciding factor for the central bank.
The reopening puts wind in the yuan’s sails
An unexpected reversal in China’s zero-covid policy gives a boost to the Chinese yuan. It has strengthened 5% against the euro since its peak in November. There is now a renewed focus on boosting economic growth through support for the real estate sector. It has been under great pressure since the bankruptcy of Evergrande (one of China’s largest real estate developers) and the risk of a full-scale crisis has not yet passed. To counter this, the Chinese government has relaxed regulations on debt capital. This gives parties in weak financial positions more room to organize their affairs, which may prevent economic collapse.
The Chinese reopening also has an impact on the Australian dollar, which is pegged to the yuan. Australia is rich in raw materials and minerals such as coal, iron, gold and lithium. Now that China’s factories are running at full capacity again, demand for these types of products is increasing, positively impacting demand for Australian dollars.
Thomas is a Benelux currency trader at Argentex in Amsterdam
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